What is happening?
A new Coronavirus (same family as SARs and MERs) broke out in China on the cusp of 2020.
As at 12 February, the virus is now thought to have infected more than 42,000 people in China and killed more than 1,000 with limited cases being discovered in a wide range of countries (mainly in people who were infected in China then travelled elsewhere).
Relevant responses of Chinese authorities have included:
- Restricting travel within China, particularly in the Hubei province - the epi centre of the outbreak
- Discouraging large gatherings; and
- Extending the national new year holiday by 10 or so days (ending Feb 9 or 10 depending on city or region)
Outside of China many governments have now banned travel to and from China, including New Zealand.
This in turn has resulted in:
- Factories closing for longer than usual during the period;
- Restaurants and food service chains closing many outlets (e.g. Starbucks reported it has closed half its outlets in China);
- Disruption to internal logistics within China; and
- Several US and European airlines reducing or cancelling flights to China.
Have we been here before?
The closest thing we have seen before appears to be the SARs crisis of 2003.
In that case, 5,327 people were infected in China (349 died), 1,755 in HK and 1,014 in other countries around the world.
SARs reduced annual Chinese economic growth from 11.1% in Q1 2003 to 9.1% in Q2 2003. The economy recovered soon after – but the Chinese economy was in much better health at the time than it is now and external economic conditions were more favourable. It is hard to find evidence that consumption of F&A products fell in China in 2003. There is no evidence that imports of food and ag products fell on an annual level (but China was less reliant of F&A imports at that time).
There are at least two important differences between the current events and SARs:
- This Coronavirus seems to have already spread more widely than SARs;
- NZ F&A is far more exposed to China in 2020 than we were at the time of SARs
- NZ sent under 5% of its ag exports to China in 2002: in 2019 it was around 31% also (with a similar extension of the products sent)
- The links between our domestic economies and China are now clearly also much stronger (via exports, tourism, education, investment etc.)
What are the likely impacts of this Coronavirus on NZ F&A?
The 1st round impact of the Coronavirus will be felt by any business that relies heavily on the food service channel in China, especially if product is perishable and requires quick distribution to and within China:
- We know that rocklobster shipments to China from NZ have all but ceased in recent weeks (see mitigating factors below);
- Chilled meat shipments for food service is a risk category
- NZ mutton shipments have already been heavily impacted. These are predominantly sold frozen, but much of the product goes into the food service industry including many hot pot restaurants.
- While wine is less perishable, clearly sales will be low right now for anyone focused on Chinese food service;
- Anything that relies on air freight to China in the hold of passenger planes is also susceptible given the termination of flights to China from NZ
In the first round, we are unlikely to see consumption of meat, dairy etc. fall. People are still eating, and reductions in eating out are offset by increased eating at home. Our China team have also noted that the rise of internet shopping in China since SARs means that sales of food are somewhat less reliant on leaving the home.
If the virus continued for many months to come, then we would likely see 2nd round impacts start to hit our F&A industry.
- Incomes may fall in China in the virus is extensive and enduring (due to disruptions to the Chinese economy);
- We may eventually see less growth in sales of premium food and beverage products;
- There may be an impact eventually on sales on meat, dairy, grain etc.
An important ‘stabiliser’ for our F&A industry in the event that Coronavirus did start to have these second round effects, is that the NZD would likely depreciate significantly as the market responded to slowing economic growth and rising risk concerns. This would offset somewhat any fall in global commodity prices when expressed in our local currency terms.
Commodity specific comments
Dairy
- At this stage we expect limited 1st round impacts on dairy shipments to China from NZ.
- Most of what is shipped (powders, IMF) has a good shelf life and is sold for consumption at home. For these product, logistical disruption is the key risk.
- While cheese still has a good shelf life, it is mainly used in food service so is more exposed to any downturn in foodservice (especially western style fast food).
Red meat
- Disruption to supply chains in China has made it difficult to distribute red meat imports, negatively impacting China’s short-term import demand until these supply chain distributions are resolved.
- Reduced eating out by Chinese consumers is expected to create some additional short term disruption to demand for imported red meat.
- NZ exporters have the ability to redirect lamb exports into alternative markets where demand remains solid, albeit at a discounted price which will put downward pressure on prices.
- Limited alternative markets for mutton (with > 70% NZ mutton exports going to China) potentially means a slowdown in mutton processing until supply chain distribution resolved.
- NZ exporters have the ability to redirect manufacturing beef product into the US market where demand remains healthy, although exporters will have more difficulty finding market space for prime beef (which has become increasingly reliant on China in recent years). This could see bull and cow processing prioritized over prime cattle in the short-term, increasing waiting times for farmers wanting to get prime cattle killed.
- The general shortage of protein in China as a result of the African swine fever outbreak is still expected to result in ongoing strong demand from China once the short term impacts of coronavirus are overcome.
Wool
- Labour shortages due to travel restrictions and factory shutdowns are expected to reduce Chinese import demand in the short term.
- At this point, most factories are expected to start re-opening this week.
- However, this depends on whether the spread of the disease can be curtailed.
- Depending on the extent of the Coronavirus there may be implications for the Chinese economy which would impact longer term demand for NZ wool.
Wine
- On -premise consumption of wine in China in 2019 accounted for around one third of sales. We expect sales into this channel to fall in the short term whilst restrictions on group dining remain in place.
- We expect that volumes of wine sold via e-commerce will rise as distributors attempt to push more product into, and invest more money in developing, this sales channel. NZ has limited exposure to the Chinese wine market in general.
Horticulture
- Fortunately the cherry industry had air freighted most of its crop to China before the virus hit: something that would have been highly problematic a month later.
- In the next 2-3 months the main threat to export fruit and vegetable crops will be logistical, with demand from Chinese consumers for quality imported fresh produce not expected to reduce from current levels
Rabobank New Zealand is a part of the global Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has nearly 120 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 40 countries, servicing the needs of about 8.6 million clients worldwide through a network of close to 1000 offices and branches. Rabobank New Zealand is one of the country's leading agricultural lenders and a significant provider of business and corporate banking and financial services to the New Zealand food and agribusiness sector. The bank has 32 branches throughout New Zealand.
Media contacts:
David Johnston
Marketing & Media Relations Manager
Rabobank New Zealand
Phone: 04 819 2711 or 027 477 8153
Email: david.johnston@rabobank.com
Denise Shaw
Head of Media Relations
Rabobank Australia & New Zealand
Phone: +612 8115 2744 or +61 2 439 603 525
Email: denise.shaw@rabobank.com
